The new public database by the East Asian Bureau of Economic Research at the Crawford School of Public Policy at the Australian National University shows Chinese commercial investment peaked in 2016 at $14.9 billion, before falling to $8.9 billion last year.
"This is an unusual drop in Chinese investment into Australia and the decrease was significantly larger than the 19.3 per cent fall in China's worldwide foreign direct investment," said the project's leader Peter Drysdale.
"There were a few reasons for the sudden decline and getting an accurate picture of what's going on is half the battle in having a sensible public discussion.
"The careful understanding of that is important to the development of a policy approach, which will ensure all the risks associated with Chinese investment, from a public interest viewpoint, are covered."
The data revealed that from 2014 to 2017, while the mining industry was the dominant destination of Chinese funds, investment in transport infrastructure and real estate also accounted for a large proportion.
The sharp decline in Chinese investment comes amid Canberra's reluctance to sign up to President Xi Jinping's signature foreign policy initiative - the Belt and Road infrastructure program.
The government has also taken a tougher line on foreign investment in Australian infrastructure assets, setting up the Critical Infrastructure Centre within the Home Affairs Department to assess potential acquisitions.
"In Australia, we have to be clear-eyed what it is we're trying to protect," Drysdale said.
"Rather than close off Chinese investment in infrastructure, both countries need to frankly sit down and talk about how to manage the risks.
"There is a strong appetite for infrastructure investment funds and it can't all be sourced domestically. China is the largest source of new capital in international markets by a significant margin."
Total overseas direct investment from China fell just over 19 per cent to US$158 billion ($222 billion) last year, the first fall since 2003, but still the second highest in history, according to the China Annual Statistics.
Over the past two years, Chinese overseas direct investment accounts for more than 10 per cent of the global flows, behind only the US and Japan.
"While big transactions made by the bulk of Chinese investment in Australia over the period, increasingly there were deals valued at less than $100 million, and there are also more private sector transactions," Drysdale said.
"China was facing push-back against its investments in many countries, not just Australia."